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Price Elasticity and Revenue Analysis

The document analyzes the price elasticity of demand (PED) between different price points, concluding that demand is elastic when the price drops from $20 to $18, resulting in an increase in total revenue from $8,000 to $8,100. However, when the price decreases from $18 to $16, the demand becomes unit elastic, leading to a decrease in total revenue from $8,100 to $8,000. Overall, the findings illustrate how changes in price affect demand sensitivity and total revenue.

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23 views3 pages

Price Elasticity and Revenue Analysis

The document analyzes the price elasticity of demand (PED) between different price points, concluding that demand is elastic when the price drops from $20 to $18, resulting in an increase in total revenue from $8,000 to $8,100. However, when the price decreases from $18 to $16, the demand becomes unit elastic, leading to a decrease in total revenue from $8,100 to $8,000. Overall, the findings illustrate how changes in price affect demand sensitivity and total revenue.

Uploaded by

mobsbouk
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

1.

Price Elasticity of Demand from $20 to $18


To figure out how sensitive the quantity demanded is to the price change, we calculate the price elasticity of demand
(PED). This tells us whether the demand is elastic (meaning a price drop causes a big increase in demand) or
inelastic (where demand doesn’t change much).

First, we calculate the percentage change in quantity demanded:

%Change in Quantity Demanded = ((450 - 400) / 400) x 100 = 12.5%

Then, we calculate the percentage change in price:

%Change in Price = ((18 - 20) / 20} x 100 = -10%

Now, we can calculate the price elasticity of demand:

Ed = 12.5 / -10 = -1.25

Since the absolute value of is greater than 1, the demand is elastic. This means that reducing the price leads to a
more than proportional increase in quantity demanded.

2.Would Total Revenues Rise or Fall from $20 to $18?


Because the demand is elastic (with Ed > 1), when the price goes down, quantity demanded increases by a larger
percentage. This means total revenue will rise, and to confirm it let's look at the total revenue before and after the
price drop.

At the original price of $20 per meal:

TR = 20 x 400 = 8000

After the price drops to $18:

TR = 18 x 450 = 8100

Since total revenue increased from $8,000 to $8,100, we can confidently say that total revenue rises.

3.Price Elasticity of Demand from $18 to $16


Next, we look at the price elasticity of demand between $18 and $16. This tells us whether demand is still elastic or
not after the second price change.

We calculate the percentage change in quantity demanded:

%Change in Quantity Demanded = ((500 - 450) / 450) x 100 = 11.11%


We also calculate the percentage change in price:

%Change in Price = ((16 - 18) / 18) x 100 = -11.11%

Now, the price elasticity of demand comes out to:

Ed = 11.11 / -11.11 = -1

Since the absolute value of Ed is exactly 1, the demand is unit elastic. This means the percentage change in quantity
demanded is exactly proportional to the percentage change in price.

4.Would Total Revenue Rise or Fall from $18 to $16?


Since the demand is unit elastic (with Ed = 1), a price decrease results in a proportional increase in quantity
demanded, so total revenue stays the same. Let's check the total revenue before and after the second price change.

At the price of $18:

TR = 18 x 450 = 8100

After dropping the price to $16:

TR = 16 x 500 = 8000

Here, we see that total revenue actually drops from $8,100 to $8,000, meaning total revenue falls.

5.Total Revenue at the Three Meal Prices


Finally, let's calculate the total revenue at all three price points to confirm our conclusions.

At $20 per meal:

TR = 20 x 400 = 8000

At $18 per meal:

TR = 18 x 450 = 8100

At $16 per meal:

TR = 16 x 500 = 8000

In conclusion:
● When the price drops from $20 to $18, total revenue increases from $8,000 to $8,100, confirming that the
demand is elastic and revenue rises.
● When the price drops further from $18 to $16, total revenue decreases from $8,100 to $8,000, confirming
that the demand is unit elastic and revenue falls.

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